April 2006


The information contained in this Newsletter is of a general nature and does not constitute legal advice






On 26 April, 2006, the Ministerial Order 1199/2006 of 25 April (the “Order”) implementing the provisions of the Regulations on Collective Investment Schemes (“RIIC”) on Free Investment Collective Schemes (“IICIL”) and Funds of Hedge Funds (IIC of IICIL) and empowering the CNMV to enact further regulations, was published in the Spanish Official Gazette (Boletín Oficial del Estado). This express power will finally enable the CNMV to publish the Circular on IICIL (the Spanish Hedge Funds) and IIC of IICIL (Funds of Hedge Funds for individuals “retail”) that the market had been long awaiting. Once the CNMV publishes the Circular, which is due to take place soon, the application files to amend the resources of those management companies that are going to manage hedge funds and the authorisations of this type of IICs may be filed with the CNMV.

The Order deals with and implements different aspects of the regime that would apply to IICIL and IIC of IICIL, although a complete analysis of the regulations cannot be made until the final wording of the CNMV’s Circular is known. We have summarised the content of the Order in this newsletter drawing a comparison, when applicable, with the project circulated by the General Directorate of the Treasury and Financial Politics (the “Draft”). Nevertheless, with regard to certain deletions, the Circular of the CNMV and the Order must be analysed in conjunction in order to determine if they intend to modify the regime or to leave the implementation of the regulations in the hands of the CNMV.

The principal questions addressed in the Order are the following:

1.                 Indebtedness limit:

The Order clarifies that the calculation of limit to the indebtedness (five times the assets of the IIC) will be made taking into account all the cash received by the CIS (principally, loans and credits) and without taking into consideration temporary securities lending, financing received through sell-buyback operations and through the sale of borrowed securities.

Therefore, it is confirmed that the limit makes reference to the cash leverage and not to the leverage through financial instruments of derivatives, repurchase transactions, sell-buyback transactions, loans of securities or other temporary securities lending.

2.                 Investment limits for IIC of IICIL:

The Order refers to the assets that are suitable for the compulsory investment coefficient of 60% of IIC of IICIL, as follows:

a)                 Spanish IICILs

b)                 Other IICs domiciled in countries of the OECD or with a management company or entity with similar functions to the management company and similar responsibility, subject to supervision with domicile in a country of the OECD and with similar investment rules to those established for Spanish IICIL.

There is no reference to the figure of the investment advisor, but the reference to the management company has been clarified and the requirement of these IICs to have an investment policy similar to Spanish IICILs has been replaced by the requirement of having similar investment rules. Thus, the comparative element to verify if an asset is suitable will be set out in the rules included in the RIIC or its implementing rules for IICIL, and not in the investment policy of Spanish IICIL.

c)                 Management companies, portfolio companies and vehicles or similar structures, which prospectus or incorporation documents provide investment rules similar to those established for the Spanish IICILs, the purpose of which is to track an IIC with such characteristics (managed accounts), and that are domiciled in countries of the OECD or the company in charge of the management is subject to supervision and is domiciled in a country of the OECD.

In relation to the managed accounts there has been a similar replacement of the reference to investment policy by investment rules.

Finally, the limitation contained in the Draft concerning the maximum 10% investment limit in IICs which invest more than 10% in entities with the same characteristics or in other IICs has not been included, nor have the deadlines for the regularization when IICs of IICIL exceeded the 10% limit in a single IIC been applied.

3.                 Calculation of the NAV:

The Order refers, for the calculation of the net asset value, to the basic principles and general valuation criteria established on a general basis for financial IICs, although it allows the CNMV to establish additional specifications.

4.                 Redemption rights in IICIL and IIC of IICIL

For IICILs, the Order only sets forth that it is possible not to provide investors with redemption rights on every date the NAV is calculated, provided that it is specified in the Prospectus of the IICIL. In any event, the minimum three-month period for the calculation of the NAV applies as set forth in the RIIC.

Finally, the Order has included neither the possibility of introducing an initial lock-up period of two years, nor specific provisions regarding prior notice periods for subscriptions or redemptions which were contained in the Draft.

The same regime will be applicable to redemptions by IIC of IICIL.

5.                 Estimated NAV:

The Order foresees the possibility for management companies of providing unit holders and shareholders with preliminary or indicative estimates of the NAV, calculated by them in accordance with their estimates of fees, expenses and benefits. The estimates of NAV will not apply to subscriptions and redemption orders. This possibility must be expressly foreseen in the corresponding Prospectus.

6.                 Management Companies:

The Order only sets forth that management companies of IICILs and IICs of IICIL must adapt their articles of association, resources and structures in order to comply with the specific requirements that the CNMV may establish, which will also determine the necessary requirements if management companies delegate their functions.

This also applies to Free Investment SICAVs and SICAVs of IICIL which have not appointed a management company.

Finally, the Order has not included, as foreseen in the Draft, the management company’s obligation to be aware of the number of shares or units held by the IICs which are underlying third party structured transactions.

7.                 Control by the Depositary:

A reference is made to the obligation of the Depositary of having a control system in order to guarantee that investment-selection procedures comply with the provisions of the applicable regulations, stating that the CNMV will set forth the terms of such control.

8.                 Financial collateral arrangements:

In contrast with the Draft, the Order only sets forth the obligation of informing the Depositary (instead of signing a sub-custodian agreement or obtaining an authorisation in writing from the Depository of the financial guarantee agreement), when a financial collateral arrangement is entered into with a third entity by virtue of which, ownership of the asset is transferred or pledged with the disposal right in favour of the pledgee. The Order requires the financial collateral arrangement to provide that the Depositary of the IICIL receives the necessary information for its supervisory and vigilance functions.

One of the novelties introduced with respect to the Draft is to limit the execution of financial collateral arrangements to financial entities subject to the supervision of an OECD country.

Reference is made in the Order to Royal Legislative Decree 5/2005, to establish that financial collateral arrangements shall foresee the liability of both the IIC and the beneficiary of the pledge, in the event their obligations are breached and in cases of insolvency. In particular, the Order sets forth that once the insolvency procedure of the beneficiary of the pledge has been opened, IICIL and IIC of IICIL  shall immediately terminate the financial collateral arrangement, making a sole net payment by the party with the largest debt vis-à-vis the other, taking into account all the relevant obligations.

The CNMV is empowered to determine any additional contents that must be included in the prospectus and in the periodic information of the IIC regarding financial collateral agreements and the clauses of the agreements from which financial collateral arrangements derive.

9.                 Investors’ consent:

Investors must sign a consent document, as requested by the RIIC, in an independent document from the subscription order. Both documents shall be signed at the same time. Furthermore, the consent document shall also apply if the subscription is made by telematic means. The CNMV is entitled to develop the necessary requirements and adaptations which may be necessary for the fulfilment of the mentioned obligations.

As a novelty, the exceptions foreseen by the Draft as regards qualified investors and investors who have subscribed portfolio management agreements have been deleted.

10.             Management fees:

Finally, the Sole Additional Provision (Disposición Adicional Única) of the Order empowers the CNMV to implement the necessary regulations to calculate management fees over profits. This power is outside the scope of IICIL and IIC of IICIL, but refers to the general scope of IICs.

Together with the amendments referred to above, the Order has finally not included the express prohibition of mixed structures in the umbrella IIC.

It is noteworthy that the Order has deleted the reference to other general matters (different to free investment matters) which were included in the Draft (e.g., accounting rules).


The Order implies, in general, a significant advance for the creation of a Spanish “hedge funds” market, not only because of the new measures introduced, but also because the CNMV will publish the Circular completing the regime that is to apply to this kind of investment vehicles and thus paving the way for the much awaited market. The final text of the Order introduces several amendments that, as explained above, in contrast to the Draft, in some cases improve and relax the existing regime for IICILs and IICs of IICIL. In other cases, the amendments have isolated or distanced themselves from the international “hedge funds” market. Notwithstanding this, the situation of the Spanish IICILs and IICs of IICIL cannot be analysed in depth until the final wording of the Circular is published.

April 27, 2006


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For further information, please contact Salvador Ruiz Bachs (srb@uria.com) or Marta Oñoro Carrascal (moc@uria.com) (phone number 915860696) in our Madrid office, or Juan Carlos Machuca (jcm@uria.com, phone number +44.20 7.645.02.80 ) in our London office.


The information contained in this Newsletter is of a general nature and does not constitute legal advice